Correlation Between Avalanche and REP

Can any of the company-specific risk be diversified away by investing in both Avalanche and REP at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Avalanche and REP into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Avalanche and REP, you can compare the effects of market volatilities on Avalanche and REP and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Avalanche with a short position of REP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Avalanche and REP.

Diversification Opportunities for Avalanche and REP

0.82

Correlation Coefficient

Avalanche  REP

Very poor diversification

The 3 months correlation between Avalanche and REP is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Avalanche and REP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on REP and Avalanche is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Avalanche are associated (or correlated) with REP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of REP has no effect on the direction of Avalanche i.e., Avalanche and REP go up and down completely randomly.

Pair Corralation between Avalanche and REP

Assuming the 90 days trading horizon Avalanche is expected to generate 1.5 times less return on investment than REP. But when comparing it to its historical volatility, Avalanche is 3.28 times less risky than REP. It trades about 0.24 of its potential returns per unit of risk. REP is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  38.00  in REP on September 2, 2024 and sell it today you would earn a total of  34.00  from holding REP or generate 89.47% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Avalanche  vs.  REP

Avalanche

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Avalanche are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Avalanche exhibited solid returns over the last few months and may actually be approaching a breakup point.

REP

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in REP are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, REP exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Avalanche and REP

The main advantage of trading using opposite Avalanche and REP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Avalanche position performs unexpectedly, REP can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in REP will offset losses from the drop in REP's long position.

The idea behind Avalanche and REP pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.